The Top Ten for 2015

Looking back at the top 10 stories in the media/telecom industry in 2015

In no particular order, they were:

• Too Big to Merge -- Comcast and Time Warner Cable (TWC) part ways
• Not Too Big to Merge – AT&T and DirecTV are now one à AT&T Entertainment
• Maybe Not Too Big to Merge – Charter, TWC, and Bright House Networks announce merger plans – if approved in 2016, major concessions/perks to the “interested” parties are likely
• After 13 years (1992 Cable Act), local cable markets are now presumed to be effectively competitive
• ISPs (fixed and mobile) were re-classified under Title II of the 1934 Communications Act as part of the Net Neutrality ruling by the FCC
• The FCC rules that municipal broadband providers can expand their networks in states that have laws preventing such expansion --- FCC okay with preempting state laws if they deem that broadband deployment is being hindered
• Skinny is good – skinny bundles become the new “play” by cable providers to hold onto subscribers
• Cord-cutting accelerates as program watchers find a growing array of alternatives acceptable/preferable
• ESPN is vulnerable – always considered the must have in the TV-bundle; that doesn’t seem to be the case anymore
• Content is still king – networks (Showtime) and programs (Daily Show) cut their own deals with distributors

The year ahead promises continued challenges to the new laws and regulations, more consolidation and convergence, and a dizzying-array of new and re-packaged service offerings.  

On the Go with GoPro

In the fall, Verizon launched Go90, its ad-supported, non-subscription, mobile-only streaming platform.  The target audience consists of the on-the-go millennials and teens who are comfortable with viewing content, short and long in length, on their mobile devices.  The service, available from the iTunes and Google Play app stores, has been downloaded nearly 2M times as of mid-December (estimate by Apptopia).    The service is useable on all wireless networks, although some content is offered exclusively to Verizon Wireless subscribers.  The growing content consists of traditional television shows (not networks), online videos, and live sporting and concert events. 

In Q1, Verizon is expected to launch a paid version of Go90 consisting of zero-rated premium content.  Content providers may be “sponsoring” the data cap exemptions which raises concerns that Verizon (and T-Mobile with Binge-On and Comcast with Stream) may be testing the limits of net neutrality rules.

It's Showtime!

Showtime, always an add-on, has done it again.  As of a few weeks ago, Amazon Prime subscribers can get Showtime for $8.99/month ($10.99 without the Prime subscription.)  Showtime is available through Amazon's apps on mobile devices, streaming boxes, and connected television sets (via Fire TV and Fire TV stick).

Showtime has always been available this way through cable TV.  It is now available as an add-on on Hulu (this summer), Apple TV, Google Chromecast, and Roku.  Content has always been king.  And, with hit shows like Homeland and Ray Donovan, Showtime is in the driver's sit in negotiations with distributors of all shapes and sizes.  By contrast, lower quality channels that have survived inside the cable bundle have a lot to be nervous about.

Buyer's Remorse?

Laura Martin, media analyst at Needham & Co., suggests that for some consumers it won’t take much for the total cost of a slimmed-down and customized set of video channels to cost more than the $70 or so for 300+ pre-packaged channels.    

  

Bloomberg article (12/2013)

December 30, 2015 interview

How will consumers and media companies respond?  Will consumers be happy with their choices even though they will be getting less?  Will media companies slice and dice the offerings to make it so confusing that consumers long for the days of old? 

More likely, this tradeoff of price and choice is hardest for the cord-cutters who had it all, but didn’t want to pay the escalating prices for it.  The younger-generation, the cord-nevers, don’t have that relative comparison and they may be better off because of it.

Imagine

Imagine you had one more choice for your internet service.  Imagine it was a higher quality/speed service than you currently had.  Imagine there was a municipal broadband provider who was providing such a service in the neighboring community and wanted to expand its coverage into your local area.  Wouldn’t you consider this to be welfare-improving?  If yes, then, why are your elected state representatives (NC and TN) protecting private broadband firms from this government competition?  GOOD QUESTION.

The FCC wants this for you.  In February, it preempted the state laws that prevented muni broadband build-outs.  That decision is currently being challenged in court.

Note: Section 706 of Telecom Act of 1996 allows the FCC to use "measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment."  The question is whether the FCC has the authority to preempt state laws if it is deemed a “barrier”.  

Put a fork in it!

Today begins the new FCC presumption that local pay-tv markets are effectively competition.  Moving forward, municipalities can regulate basic cable rates only by requesting to do so and accompanied by proof of a lack of competition in the local market.  But, with DBS ubiquitously deployed (AT&T/DirecTV and Dish) and telephone entry (Fios and AT&T U-verse) in many markets over the past two-decades, that will be hard to prove.  Nationwide, of the 90M+ pay-tv subscribers slightly less than half get service from a non-cable provider.  Proof of competition, right?  Yes, but, the expansion of indirect substitutes creates the greatest threat to pay-tv providers and the reason why regulation of basic cable rates is no longer necessary.

A Philly company…it’s gonna cost ya!

Last week, the city of Philadelphia signed a 15-year franchise renewal agreement with Comcast.  The agreement allows Comcast to continue to use public rights-of-way to operate its cable system in the city of brotherly love.  What does the city get in return?  Plenty!

• Franchise fee of 5% of Comcast’s gross revenue (>$17.5 million annually, expanded to include PEG and FCC fees)
• Public, Educational, and Government funding of $21.3M (from $8.2M)
• 11 PEG channels (including expansion of HD channels)
• Expanded PEG VOD capacity from 8-hours to 20-hours.
• $1M/year in complimentary services to municipal locations, schools, and libraries.
• Institutional Network ($10M in network construction costs not billed to the City)
• The expansion of Comcast's Internet Essentials program to include low-income seniors
• Discounts of at least 10 percent for low-income seniors on cable service;
• $500,000 grant to the city's Digital Inclusion Alliance Fund

Any problems for Comcast?  Maybe one!  The city of Seattle, currently in contract talks with Comcast, wants the same deal.

Monopolizing Ad Sales

About two weeks ago, The Department of Justice announced that it had opened an investigation into Comcast’s spot ad sales practices.  Comcast Spotlight, a subsidiary of Comcast, sells cable advertising to businesses who want to advertise locally on channels distributed by both Comcast and rival MVPD operators (like RCN, AT&T U-verse, Centurylink).* 

In carriage agreements between programmers and MVPDs, programmers allocate about 2-minutes of each hour to local ad buyers.  The “interconnect” business model has the dominant MVPD in each market sell the inventory ad space, representing all MVPDs in the negotiations.  Because of its national footprint, Comcast leads the interconnect negotiations in 26 of the top 50 markets.   

The DOJ is investigating whether Comcast’s practices involve monopolizing or attempting to monopolize spot ad sales in local markets.  On the surface, the selling cooperative matches buyers and sellers more efficiently than each MVPD negotiating ad sales separately.  The question, however, is whether Comcast’s (dominant position and) actions creates an unreasonable restraint of trade that is harming competition (and competitors like non-affiliated cable ad representative, ViaMedia). 

*RCN just announced that it was switching from Viamedia to Comcast beginning on 1/1.  

Brand X

Does a pro-Title II decision hinge on Brand X?  It might!  In the 2005 case, NCTA et al. v. Brand X Internet Services et al., the Supreme Court ruled that the FCC has the authority, under the 1996 Telecom Act, to decide if broadband is an information or telecommunications service.  At the time, the FCC ruled that broadband was an information service.  Ten years later, in its February 2015 Open Internet Ruling, the FCC changed its position.

 

And, so, what a difference a year and a politically-influenced change of heart makes. 

In Verizon v. FCC (2014), the plaintiffs were victorious in shooting down efforts to impose the conduct rules against blocking and unreasonable discrimination because the Court determined that the Commission could not impose public-utility regulation on an information service. 

On Friday, the issue of net neutrality was once again front-and-center.  This time it was in Court of Appeals of the District of Columbia.  The three-judge panel heard arguments for and against the FCC’s decision to reclassify broadband internet service (fixed and mobile) as a common carrier under Title II of the Communications Act and therefore subject to utility-type regulation. 

It is likely that the Court will affirms the FCC’s authority to classify broadband as it sees fit.  Regulation will follow as the Commission believes that “broadband providers represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment.” (Verizon v. FCC, 2014)

Negotiating in good faith?

The media marketplace has changed significantly over the past decade, including more consumer choices for how, where, and when we watch video programs.  Content has always been king, but with alternative distribution channels available (e.g. internet, mobile), even more power has shifted to broadcasters in retransmission negotiations.  Without surprise, distributors are none too happy and are trying to wield their considerable influence with the FCC to get things changed….all under the guise of protecting the interests of consumers. 

So, while the number of program disruptions resulting from retransmission disputes have increased in recent years, without that threat and reality, we have to ask: who would be better off?  Maybe consumers would be in the short-run.  But, they have choices and could ultimately take their business elsewhere.  MVPDs, on the other hand….

Some background:

Section 325(b) of the 1934 Communications Act (as amended in 1992) requires cable systems and other pay television services to obtain a television station’s “retransmission consent” before carrying the station’s signal.  Broadcasters and MVPDs are required to negotiate these market-based agreements in good faith and minimize programming service disruptions (“blackouts”).  Violations of good faith negotiations can be determined as either per se breaches or in the totality of the circumstances.

And, now:

In March of 2011, the FCC released a Notice of Proposed Rulemaking (NPRM) to consider possible amendments to these rules, including providing guidance to the parties on good faith negotiation requirements.   With that NPRM still pending, Congress directed the FCC in the STELA Reauthorization Act of 2014 to begin a review of its totality of the circumstances test for good faith negotiations. Also included in the NPRM, released in September, was a request for comment on whether there are specific practices that constitute evidence of bad faith (i.e. preventing online access to programming, banning networks from negotiating on behalf of affiliate stations, and bundling broadcast and non-broadcast programming).

What's in our best interest?

Included in arguments for regulatory approval of its merger with Time Warner Cable and Bright House, Charter stated that it will comply with net neutrality rules even if they are later found to be illegal on appeal, and will continue to significantly invest in its broadband network.*

   

So, what happens if this merger and future ones are approved?**   Should we believe that we will be better off with fewer providers who may have greater scale and scope to provide all of our communication needs?  Isn’t this what the phone company was decades ago (as a regulated public utility)? 

Let competition thrive!  Both regulatory overreact and further industry consolidation will impede this from happening.

*The National Cable and Telecommunications Association supports Net Neutrality but not Title II reclassification.  (A position I agreed with.)    

**Highly unlikely Charter/TWC/Bright House is the last merger.

Former merger partners have contrasting plans for the set-top box

Within a few weeks of each other, former merger partners, Comcast and Time Warner Cable (TWC), announced different plans for the cable box that subscribers pay hundreds of dollars in fees to rent each year.  Comcast wants to leverage the data captured in those boxes and license it to third parties who are interested in knowing what/how/when we watch video programs.  TWC, on the other hand, is experimenting with getting rid of the box all together and replacing it with an app that interacts with media streaming devices such as Roku.  While both cable providers are among the two most hated firms in America (according to the American Customer Satisfaction Index), if TWC is able to make this happen (and merge with Charter), Comcast may find itself alone at the bottom.  Let’s see what happens!  

wsj.com: comcast-seeks-to-harness-trove-of-tv-data

cbsnews.com: time-warner-cable-lets-lose-the-cable-box

Step 1 in Getting a Cable Merger Approved…Don’t Upset the Little “Guy”

Apparently, a necessary (and maybe sufficient) condition in getting regulators to approve a cable system merger is to have an agreement by the MVPD to carry RFD-TV.  Charter just renewed its agreement to carry RFD-TV.  The rural channel and its parent, Rural Media Group, now support the Charter-Time Warner-Brighthouse merger.   AT&T agreed to carry the channel on its U-verse systems after announcing its plans to merge with DirecTV.  The deal closed this summer. 

Comcast wasn’t so easy to “win over”.  Comcast dropped the channel in some of its urban/suburban markets because of low viewership numbers.  Because of its concerns that the industry’s consolidation trend ignored the interests (and viewing preferences) of rural Americans, RFD-TV asked the FCC to impose rural carriage conditions if it approved Comcast’s merger with Time Warner Cable.  Comcast didn’t acquiesce.  The merger didn’t happen.  

Another Merger....Everyone Knows the Drill

A few months after regulators approved its $48.5M merger with DirecTV, AT&T, in an October 13^th letter to the FCC, raise concerns that the Charter-Time Warner (and Bright House) merger would harm competitors and consumers.  They claim that cable firms, who choose not to compete head-to-head in local markets (see map), will find it easier to coordinate national activities, namely sharing affiliated programming with each other and raising costs to non-cable rivals.*  AT&T claims that:

“Cable companies share common, national rivals in broadband, video, and telecommunications services.   These geographically segregated cable companies therefore have incentives to coordinate their activities to fend off these common rivals and have demonstrated the ability to do so.”

Dish also petitioned the FCC on Tuesday to deny the merger claiming that similar to the Comcast-Time Warner merger, the larger operator could harm online video services (e.g. Sling).

Publicly opposing the merger is what the satellite providers have to do.  (In hindsight, Verizon should have been on record opposing the 2011 AT&T-T-Mobile.)  A more concentrated market helps the remaining competitors.  In the months/years ahead, expect more consolidated in the saturated pay TV/broadband market.  And, expect more weak statements of opposition from competitors.

*While AT&T is now the largest paid TV provider with 26M subscribers, its 5M broadband subscribers is much smaller than the 20M+ subscribers each for Comcast and a combined Charter-TW-Bright House.

Streaming Your Way: The Disutility of Too Many Choices

From the beginning of cable time, we have been “offered” a limited number of programming packages.  And, for most of us, regardless of what package we selected, we were getting channels we didn’t watch.  For decades, we clamored for the ability to select the channels we wanted to watch even when warned by the cable operators that it would cost us more money.  

Fast forward to 2015.  We now have an expanding array of skinny bundles from video distributors/program outlets.  (An incomplete list is below.)   If this is the transition to the new normal of selecting and paying for all channels on demand, I’m not sure we will be better off.  And, it’s not just about the money it’s going to cost us.  It’s about what Barry Schwartz calls the “paralysis of choice”.  (See link to his Ted talk below.)  With so much to choose from, will we become overwhelmed and increasingly dissatisfied?  What is the right number and variety of programming that would make us feel better off?  Does it exist?  Or, are we destined to be unhappy because we long for the good ole days when TV (with a handful of broadcast channels) was free.  

Barry Schwartz's Ted Talk

Firm	Genre	Monthly Price
NBC Comcast (Seeso)	Comedy	$3.99
CBS (All Access)	Multi	$5.99
Time Warner	HBO Programming	$14.99
Dish (Sling)	Multi	$20 (includes ESPN, CNN)
Hulu (ABC, NBC, the CW, FOX)	Multi	$7.99 (with ads) $11.99 (w/o ads)
Netflix	Multi	$9.99
Amazon Prime	Multi	$99 per year

Carriage Disputes and the FCC’s Role

Is it fair to expect that FCC involvement or threat of involvement in carriage disputes would lessen the frequency of blackouts in local markets?  Would it be to the advantage of the consumer if they do?

Over the past several years, must-carry fees compensating broadcasters for their station feeds have skyrocketed.  With declining pay-TV subscriptions, MVPD operators have pushed back on both the requested rate hikes and the continued bundling of sub-channels in with top-tier channels.  Broadcasters have counter-punched by withholding channels and blocking online access to shows during disputes.  Nearly 150 broadcaster blackouts so far in 2015 have caused consumer harm.  By “using” the consumer in negotiations, is that fair?  But, by regulators preventing or limiting the use of a private party’s leverage in negotiating an agreement, is that fair?  

When is some competition enough?

Beginning with the 1992 Cable Act, the FCC allowed local franchise authorities to regulate local cable rates only if there was not a finding of effective competition.*  At the time, cable operators had a 95% share of the MVPD market.

Pointing to the now ubiquitous availability of satellite TV and evidence that 99.7% of U.S. homes have access to at least 3 MVPDS (and 35% with access to 4 MVPDs), the FCC, in June, adopted a rebuttable presumption that cable operators, both large and small, are subject to Competing Provider Effective Competition.  The rule, approved by a 3-to-2 margin, shifts to local governments the burden of demonstrating that effective competition does not exist in their communities in order for them to regulate local cable rates. 

Concerned about less oversight at the local level and the possibility that cable operators who had negotiated retransmission consent agreements may choose not to carry broadcasters on the basic service tier, the National Association of Broadcasters (NAB) and two other groups petitioned a federal court for a review of the new FCC rule.  Since its filing about a month ago, no action has been taken by the court.  Today, however, the American Cable Association (ACA) and National Cable & Telecommunications Association (NCTA) requested the court if they could intervene in support of the FCC's decision.

*4 categories of effective competition: 1) low penetration, 2) competitive provider, 3) municipal provider, and 4) LEC provider.

Choices Matter! So, why don’t we have them when it comes to cable boxes?

On our behalf, consumer advocacy groups have argued for a la carte pricing options to replace cable programming bundles.  Paying for networks we didn’t watch bothered many of us for a very long time.  Yet, the industry effectively argued back that it would take just a handful of networks purchased on an individual basis to get to a sum in excess of our existing bundled prices.  A stalemate persisted until technology changed and new entrants (e.g. Netflix) disrupted the status quo.  We now see the beginnings of unbundled programming and more choices for how, when, and what we view.

There continues to be no choice, however, when it comes to the set-top box that is needed to convert encrypted signals from the cable operator to each cable-enabled TV set in the home.  In a recent study, Congressmen Mackey (D-MA) and Blumenthal (D-CT) found that the average cable household spent $231 per year renting cable boxes (approx.. 2 boxes/household * $9.50/month *  12 months).  You sign up for Comcast’s Xfinity service, you get Comcast’s cable boxes.  You sign up for Verizon’s Fios service, you get Verizon’s cable boxes.  You get the picture…no choices.    It represents a nearly $20 billion revenue stream for the cable firms, so, at the moment, they have no incentive to change the business model.  If we are lucky, technology changes and new entrants in this segment of the video programming market will make renting cable boxes “into perpetuity” a thing of the past.

Below #1 (Comcast), it’s all about consolidation in the U.S broadband market

For you and me, nothing much will change when regulators approve the proposed merger of TWC with Charter/Bright House Networks and Altice’s acquisition of Cablevision and Suddenlink.  These competitors don’t compete with each other for our business.  We had few broadband provider choices before industry consolidation.  We will continue to have few choices after.

    

What might happen though is that the operational scale and negotiating heft of the merged firms will improve and they could potentially offer better/expanded service.  Time will tell what they do with their size.

The value of Lifeline

A 2013 Pew study found that 15 percent of Americans do not use the Internet at all.  19 percent cite the expense of owning a computer or paying for access as the reason for their non-use, while another 7 percent cite lack of availability or access.

In an earlier Pew study (2010), 43 percent of survey respondents indicated that individuals without broadband at home were at a major disadvantage in learning about job opportunities or gaining career skills.

Using 2013 Pennsylvania county data (N=67) and examining the impact of access to high speed broadband and other characteristics have on the labor market, it was found that for every 10 percent increase in high speed broadband penetration, the unemployment rate declined by 1.8 percent.   

Variable	Ln(Unemployment Rate)
Intercept	5.30***
Ln(% pop with high speed broadband)	-0.018*
Ln(pop/square mile)	-0.014
Ln(% pop with BS degree or higher)	-0.226***
Ln(% pop that is white)	-0.554***
R2 = .40	Significance *** 1%, **5%, *10%

Data source: www.broadbandmap.gov

Making broadband access more affordable to low income households through the Lifeline program can potentially reduce structural unemployment.  Inadequate safeguards against past program abuses must be rectified, rather than used as excuses not to expand it.

 http://www.nytimes.com/2015/06/03/technology/republicans-resist-fcc-proposal-for-lifeline-broadband-subsidies.html?_r=0

What a difference one more competitor can make!

Using U.S. county data (n=3,140) from the National Broadband Map and relating the percent coverage by 2 or more vs. 3 or more wireline providers with the percent of a  population with access to high speed broadband (25 mbps), it was found that:

Table: Column headings are percent access to high speed broadband.  Row headings are percent coverage by the number of providers (2 or more vs. 3 or more)

At the low end:

12% of counties had 2 or more providers serving less than 10% of the population.  That percent jumps to 59% with 3 or more providers. 

In the middle:

66.6% of counties had 2 or more providers serving at least 50% of the population.  The percent drops to 19.8% with 3 or more providers.

At the upper end:

18.7% of counties had 2 or more providers serving at least 90% of the population.  (78.5% of these counties provided high speed broadband to more than 90% of its residence.)  

Just 3.6% of counties had 3 or more providers serving at least 90% of the population.  (98.2% of these counties provided high speed broadband to more than 90% of its residence.)

Slightly more than 20% of counties have 10% or less of its population with access to high speed broadband.  Among these counties,

Ø  38% have 10% or less coverage by 2 or more providers.

Ø  88% have 10% or less coverage by 3 or more providers.

Slightly more than 20% of counties have more than 90% of its population with access to high speed broadband.  Among these counties,

Ø  69.1% have more than 90% coverage by 2 or more providers.

Ø  16.5% have more than 90% coverage by 3 or more providers.

Putting a dent in poverty...might broadband help?

A simple regression using 2013 U.S. county data on the poverty rate and the percent of the population with access to broadband speeds > 25 mbps, reveals that for every one percent increase in high speed broadband penetration, the poverty rate falls by .015 percent.

What might be more revealing though is a look at the descriptive statistics.  Nearly equal is the percent (20%) of counties that have less than 10% and more than 90% high speed broadband access.  When ranked by poverty rates, at the top and bottom of the 3,040 counties, there is a digital divide as measured by access to high speed broadband.

Extending [a] Lifeline!

The FCC Commissioner's plan to extend Lifeline recognizes that times and technology have changed since 1985 when the program was introduced to subsidize landline phone service for low-income households.
Under the proposal, the $1.7 billion program that currently provides a $9.25/month subsidy for wireline and wireless (since 2008) service would be extended to include broadband.  The inclusion  of broadband acknowledges its importance to economic well-being.

http://www.nytimes.com/2015/05/28/business/fcc-chief-seeks-broadband-plan-to-aid-the-poor.html?_r=0

Time to change the rules

In a proposed rulemaking, the FCC is considering a change to the 22 year-old effective competition rule that requires cable operators to prove that there is effective competition in their communities before they can be exempt from local regulation of basic rates.  Under the proposed rule change, there would be the presumption that effective competition exists in all markets.  This would mean that a municipality would have to demonstrate otherwise to gain the authority to regulate rates.  The reason for the change is that the FCC has approved more than 10K effective competition requests, and has not denied any in recent years.

At the time of the initial ruling, in 1993, less than 2% of MVPD customers could choose between two or more cable providers.  Little has changed in that regard.  Gentlemen’s Agreements by the cable operators have continued to limit head-to-head competition among them.  But, beginning in 1999 and accelerating through the early part of the new millennium, DBS providers, specifically DirecTV and Dish, expanded their footprints and today cover all but a very small portion of the U.S.  Moreover, telecom companies, largely Verizon and AT&T, began offering video delivery services in major metropolitan markets in direct competition with the incumbent cable operator. So, today, in most markets, there are two (DBS only) to four (2 DBS, cable, and telco) competitors.  The mere counting of competitors in a market, however, does not suggest that competition is robust.  It merely points that in the vast majority of U.S. communities (34,000+), the current effective competition standard is met.*   “Effective” competition will have to come from new sources, not from interpreting outdated rules. 

*Effective competition is considered to exist if either the municipality or another multichannel video programming distributor (MVPD) offered an alternative service to at least 50 percent of the households in the franchise area and more than 15 percent of those households took service from a company other than the largest one.   Moreover, small cable operators are exempt from rate regulation in franchise areas where they serve fewer than 50,000 subscribers (serve less than 1% of U.S. subscribers, and do not exceed annual revenue of $250 million).

Full steam ahead...with Media M/A

It appears that the media industry set the re-start button on merger activity after last month's derailment of the Comcast-TWC merger.  Reports suggest that Charter is close to announcing a deal to acquire Time Warner Cable and Bright House Networks.  While regulators will have to review the merits of the deal, including assessing the impact on subscribers and competitors, it is highly likely the deal will be approved.  Why?  Many [not all] of the reasons are similar to why the AT&T-DirecTV merger will go through.  Here are they are:
1) A stronger #2 to Comcast.  As a share of the U.S. broadband market, a combined Charter (6%) /TWC (14%) /Bright House (3%) would have 23%, just two percentage points behind Comcast.
(Source: The Leichtman Research Group.  Percentages were of the top providers accounting for 94% of the total market.)
2) Greater scale -- geographical clustering for network efficiencies and stronger negotiating heft to balance the power of content owners.
3) In spite of expanded coverage, there is very limited market overlap.  Where there may be overlap (a few communities in southern California), regulators may require some concessions or divestitures. 4) FCC Chairman, Tom Wheeler, indicated that he is not opposed to industry mergers in spite of the Comcast-TWC decision.

Why the AT&T-DirecTV merger will be approved

About a year ago, AT&T announced its strategic response to the proposed Comcast-TWC merger ...become a bigger (stronger) firm in pay-TV by merging with DirecTV.    The value of the merger?  $48.5B

While the number of  competitors in many local markets will be reduced in this horizontal merger, the merger is likely to be approved by regulators.  Why?
1) No effect on the growing broadband market as DirecTV does not offer broadband
2) While there will be fewer competitors in the AT&T U-verse markets in 22-states, the growth in Pay-TV subscribers has turned negative in the past few years.
3) No vertical restraint issues as AT&T/DirecTV have very limited content ownership interests
4) The hope/promise of a stronger competitor (better pricing bundles, service) to Comcast and TWC in local markets
5) Greater bargaining power with content owners
6) Promise of broadband expansion to more rural communities
7) Regulatory approval concessions

Will consumers be better off?  Who knows!  Maybe the best we can hope for is not to be any worse off.

Skinny bundles: Can a la carte pricing be around the corner? Verizon says NO.

A 2014 Nielson survey showed that the average US TV household watches just 17 channels but pays for 189.  While the size of program packages has expanded significantly over the years and prices have risen greater than 2x the rate of inflation, the average number of watched channels as changed very little.*  

Not surprisingly, cable customers, for decades, have advocated for a la carte pricing.  It never came. But, change came in another way and it has forced video providers to offer more pricing options.

It began with over-the-top programming that allowed consumers to view shows anytime, anyplace.  Cord-cutting, cord-skimming, and cord-avoiding shifted some bargaining power to consumers.  While they still don't have a la carte pricing, slimmed down product bundles, like Verizon's Custom HD for $55/month, might be a "step in the right direction" (Tami Erwin, Verizon Fios President on a recent CNBC interview).

Will this make some of us happy for now?  Verizon and the other MVPDs certainly hope so!  The rest of us aren't so sure.


*Today, if a TV bundle is $90/month, the price per watched channel is more than $5/month.  

What if...

the Comcast-TWC merger doesn't go through?  We know that the Charter-Bright House deal would be called off.  The AT&T-DirecTV deal would be under even greater regulatory scrutiny and the likelihood of approval would diminish.

But, would customers of these ISPs be worse off?  The ISPs argue that they need greater scale in order to negotiate favorable programming terms.  However, in a CNBC interview on Friday, April 17, the President of Verizon Fios, Tami Erwin, indicated that at 9 million broadband customers currently ( a third of the size of a combined Comcast-TWC) the firm has "sufficient mass".*

Who do we believe?  Bigger is not always better.  In fact, it could be a lot worse.  Just look to the financial services industry.


*This excludes the impact of a pending sale to Frontier of California, Florida, and Texas systems, with 1.6 million subscribers.

A Match Made Out of Necessity. Who's Next?

About ten days ago, Charter announced its plans to purchase Bright House Networks LLC for $10.4B.  Charter, the third largest cable broadband provider (behind Comcast and Time Warner Cable, is in line to add 3.4 million subscribers through acquisitions this year (2 million from Bright House and an additional 1.4 million from TWC if its merger with Comcast is approved by regulators.)  Increasingly, the focus is on scale, primarily as it relates to negotiating favorable terms with content owners.  Among cable and telco firms, Charter will be near the subscriber count of Verizon if the deals go through.  It begs a few questions...

1) Are more deals likely?  Might the likes of Cablevision and the next-tier of cable providers or even Verizon feel a need jump into the acquisition fray?
2) What's the "right" size for an ISP given the changing landscape of video delivery services?

Yes to Apple Internet-TV? Maybe!

Assuming a new Internet-TV offering by Apple happens AND it bundles NBC’s content with that from CBS, ABC, and FOX, should I finally cut the cable cord?  Well, it depends!

	Today, I pay Verizon…	If Apple…
TV Bundle	$64.99 for Extreme HD (367 channels)	$40
Devices	$39.99 for multi-room DVR – 3 rooms	*
Internet	$55 for 50/50	$70 (still needed – assume no contract or bundle discount)
Contract/Bundle Savings	-$15.00 (-$10 for Internet and -$5 TV) through 9/15	None expected
Surcharges	$10.95 (includes $2.42 for Regional Sports Networks)	??? (some savings)
Taxes (State and Local)	$2.60
TOTAL	$158.53	approx.  $120 + one time fees
One-time fees	None	*$150 for 2 Apple-TV devices (already have 1)